What Causes Long-Term Financial Crisis?

I watched the movie Flight (with Denzel Washington) last night. It’s a dramatic story about addiction… and lying about addiction… a.k.a denial!

You see, the thing about addiction is this. First, you have to admit you have a problem… that you’re addicted to something. Of course, there are many things to be addicted to.

It could be something as simple as sugar or chocolate, cigarettes or alcohol… or even much harder drugs, from sleeping pills to pain pills to heroine.

You could even be addicted to talking too much or being right or being dominant or being a workaholic.

You could even be addicted to quantitative easing, stimulus or easy credit (what I like to call financial crack)…

But back to the movie…

Whip (Denzel) is an alcoholic pilot so adept that he landed a failing plane while high on alcohol and cocaine. He continued to lie about his addiction until the final testimony, when he just couldn’t lie “one more time” and finally admitted he was an alcoholic. He went to prison where he sobered up…

Quite simply, we’re addicts. We have been addicted to debt and Keynesian economic policies since the 1970s. Debt has grown much faster than the economy for four decades. Now we are facing the greatest debt crisis since the 1930s…

Surprise, surprise, surprise!

ALL addictions are characterized by denial.

And ALL debt bubbles in history end up in periods of austerity… when we’re finally forced to admit our problems and re-balance… get the addiction out of our system… get straight and grow again.

That is the picture of our economy over the next years and decade.

It is human nature to strive to be better and have a better life. We mostly do that through working harder, innovating, better technologies and better government and private systems for prosperity.

But we also have a natural inclination to go beyond that and cheat to accelerate such trends. We use strategies like borrowing more than we can afford to get ahead. Then when such debt bubbles go beyond natural means and sustainability, we learn to lie about it to defend such strategies.

We deny, deny, deny.

We end up like frogs in slowly boiling water. We don’t realize we’re in trouble until it’s too late to jump out.

It is natural and fiscally responsible to finance your house over the 30 years that you will raise your family and use it. It is also natural to finance a car over five or six years through its natural use.

It is NOT natural to borrow against rising home values to speculate in real estate or to fund your child’s education in private schools… or to speculate in technology stocks that are totally unproven.

It is natural for businesses to finance a plant that will generate profits over 20 years, but NOT to speculate in new businesses or markets that are unproven.

Our economy and the great boom we enjoyed from 1983 to 2007 was driven by the Baby Boomers as they ascended in their predictable productivity, income and spending cycle. And it was characterized increasingly from the mid-1990s forward by increasing speculation, rather than productive investment in the future.

Everyone wanted to make money from stock or real estate speculation and to retire early or stop working forever. We became addicted to the idea and the means of achieving it.

Now We Pay the Price

Retiring early and on speculation is not the “American Dream” and is simply not workable.

We are simply out of touch with reality after nearly three decades of the highest growth, productivity gains and investment gains in history. But such booms and debt bubbles are always, and I mean always, followed by periods of austerity to re-balance and deleverage.

The truth is that we should be retiring at age 75, not 65, especially given our much higher life expectancies today. And governments should be actively working to restructure our massive debts in the most civilized manner, like a “Chapter 11” debt restructuring, rather than flooding the economy with artificial money.

It will require a major financial crisis to get us back into reality… not more of the crack we’re addicted to.

So, plan on that!

Work now to protect yourself from the next great financial crisis to hit, likely between early 2013 and early 2015.Harry

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.